Cross-Border Insolvency and International Commercial Arbitration: The Need for Legislation

[By Nidhi Thakur and Akshita Tiwary]

The authors are students at Government Law College, Mumbai.

Introduction

The current Covid-19 pandemic has had an adverse impact on economies all over the world. The global financial crisis has resulted in recession, tightening of credit markets and a widespread lack of economic confidence. All of this has resulted in a substantial increase in insolvencies. Most commercial contracts include an arbitration clause that allows them to resort to arbitration in case of breaches. For parties participating in arbitral proceedings during or immediately after the pandemic, the potential insolvency of an award debtor will become a real concern. This interaction between national insolvency regimes and international commercial arbitration is an issue which has received relatively little attention. With several multinational companies declaring bankruptcy or insolvency, foreign creditors would be at a disadvantage when it comes to protecting their interests unless states endeavour to frame comprehensive laws on the subject. These laws can strengthen confidence in the international dispute resolution mechanism by paving the way for consistent procedures and predictable outcomes. In consonance with the same, this article aims to highlight the intersectionality and complexities arising out of parallel cross-border insolvency and international commercial arbitration proceedings, with a particular focus on the Indian stance.

Intersectionality between International Commercial Arbitration and Cross-Border Insolvency

Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors.”

The aforesaid was rightly upheld by the Singapore Court of Appeal in the case of Larsen Oil and Gas Pte Ltd v. Petroprod Ltd. International commercial arbitration is a transnational feature that seeks to resolve disputes arising out of commercial transactions conducted across national boundaries. On the other hand, insolvency is a mostly domestic proceeding which gets triggered when companies are no longer in a state to meet their financial obligations to creditors as debts become due. Cross-border insolvency occurs in a situation where the insolvent debtor has assets in more than one nation, or where some of the creditors belong to jurisdictions other than the one where the insolvency proceedings have been filed.

The United Nations Commission on International Trade Law sought to create uniform model laws for both these areas. As a result, the UNCITRAL Model Laws on Cross-Border Insolvency and International Commercial Arbitration were formulated in 1997 and 1985, respectively. However, the organisation has failed to address the interrelationship between these model laws.

International arbitration and insolvency regulation set in motion distinctive legal
procedures, with each having its own distinct purpose, objective, and underlying policy. Therefore, intersectionality between both these areas of law poses a challenge for courts and arbitral tribunals.

Certain judgements offer a unique opportunity to discuss the delicate interaction between arbitration and insolvency. In the case of Syska v. Vivendi, the English Court of Appeal upheld the decision of the LCIA arbitral tribunal that foreign insolvency proceedings should have no effect on pending arbitration proceedings, which are decided according to the law of the land where the lawsuit is pending. In this judgement, Lord Justice Longmore rightly said that to protect the legitimate expectations of people in business with regards to the certainty of transactions, lawsuits should come to an appropriate conclusion.

The Swiss Supreme Court’s decision of 2009 in the Vivendi v. Elektrim dispute upheld the award of an arbitral tribunal seated in Switzerland, which declined to exercise jurisdiction over Elektrim after it had been declared insolvent in Poland. However, in 2012, the Supreme Court overturned this decision to declare that insolvency proceedings do not affect the arbitral tribunal’s jurisdiction. The rationale behind this was that the capacity to participate in an arbitral proceeding presupposes general ‘legal capacity,’ which bestows certain rights and obligations upon the company. These rights and obligations remain unaffected even when insolvency proceedings have been commenced according to domestic laws. Hence, insolvency proceedings would have no bearing on the arbitration agreement. This gives arbitrators in Switzerland a wide jurisdiction to decide disputes relating to insolvency cases as well, which includes claims made on behalf of the estate itself. This reasoning is a desirable one, given that it protects the interests of cross-border creditors who may find themselves left without any remedy when arbitration proceedings are subverted to domestic insolvency laws.

Complexities arising due to Parallel Cross-Border Insolvency and International Commercial Arbitration Proceedings

When considered unilaterally, both seem to have an established set of laws in place. However, an inter-jurisdiction parallel proceeding raises a multitude of issues. One difficulty might be the enforceability of an arbitration agreement made before the insolvency of one of the parties. A second might be whether and to what extent the insolvency matters or bankruptcy issues could be made the subject of the arbitration. A third could be whether a stay of the arbitral proceedings could be given when insolvency proceedings have commenced. A fourth relates to the enforceability or challenge of an arbitral award on substance pending or after insolvency. A fifth might be the role of the judiciary in controlling insolvency proceedings against the background of arbitral proceedings having been commenced. The list of different contextual settings and issues can go on.[1] This anomaly requires countries to develop their domestic legal framework, which can harmoniously resolve these issues. Unfortunately, many nations, including India, have not yet taken steps to rectify this lacuna. Given the context of the current pandemic, such measures need to be deliberated upon urgently.

An Overview Of Key Indian Law Considerations

The Arbitration and Conciliation Act, 1996, is the fundamental law governing arbitration in India and is widely based on the UNCITRAL Model Law on International Commercial Arbitration (1985). It was enacted to consolidate, define, and amend the law concerning domestic arbitration, international commercial arbitration, and the enforcement of foreign arbitral awards in India. The Insolvency and Bankruptcy Code, 2016 came into force on December 15, 2016, consolidating several laws relating to the insolvency resolution of companies, partnerships, and individuals. The Code contains two provisions to assist with cross-border insolvency disputes: Agreements with foreign countries (Section 234) and Letter of request (Section 235). Although the inclusion of Sections 234 and 235 into the Code was to facilitate the resolution of cross-border insolvencies, it was observed that no steps had been taken to implement the inter-government agreements effectively. As of today, an order of the Adjudicating Authority, i.e. the National Company Law Tribunal (“NCLT”) in a cross-border insolvency matter would not be directly recognised or enforced in any foreign country. Further, even if notified, these provisions do not adequately address the complicated issues arising out of cross-border insolvency cases.

The Jet Airways insolvency proceedings is a perfect example of this, whereby the Jet group was facing insolvency proceedings in India and Netherlands simultaneously. The NCLT rejected the plea of the Dutch court-appointed administrator to recognise the jurisdiction of the Dutch insolvency proceedings, following which the Dutch administrator approached the Appellate Tribunal National Company Law Appellate Tribunal (“NCLAT”). Through the decision of the NCLAT, a ‘Cross-Border Insolvency Protocol’ was agreed upon, which recognised India as the ‘centre of main interests’ and the Dutch proceedings were recognised as the ‘non-main insolvency proceedings.’ This allowed both India and Netherlands to cooperate during the insolvency proceedings. The Dutch administrator was allowed to observe, but not interfere, in the Committee of Creditors meetings to prevent an overlap of powers. This case emphasises the need to implement a uniform law on this subject.

The Insolvency Law Committee submitted a report on October 16, 2018, to suggest the incorporation of the UNCITRAL Model Law on Cross Border Insolvency (1997) into the Code.

The Draft Provisions of the aforementioned report help the NCLT determine the imposition of the moratorium period. If the NCLT determines that a foreign proceeding is a primary foreign proceeding, arbitration and litigation proceedings in India against the corporate debtor (including their initiation or continuation) would be mandatorily subject to a moratorium. However, if the NCLT determines that a foreign proceeding is a foreign non-main proceeding, the NCLT has the discretion to impose a moratorium on litigation and arbitration proceedings against the corporate debtor in India.

Nonetheless, as of now, the Indian stand is the same as that of Polish Law explained earlier i.e. the abdication of the proceeding. Still, the outcome is subject to a case-to-case analysis.

Conclusion

It is indisputable that there is no clarity in the current framework worldwide on how to reliably deal with an insolvency situation in an arbitration context and vice versa. An inter-jurisdictional clash between the two proceedings can present a significant dilemma before parties to a contractual agreement. Therefore, there is a need for counsels versed in these complex proceedings to initiate a discussion, draft suggestions to resolve the issues, and recommend requisite implementation strategies to streamline and harmonise the intersectional proceedings. It would be reasonable to pre-empt such a scenario and address it beforehand while negotiating contracts because what emanates after insolvency is triggered, leaves less or no room for the parties to breathe in.

Endnotes:

[1]Nigel Blackaby et al., Redfern and Hunter on International Arbitration 117 (Oxford: Oxford University Press, 2018).

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